CBO projects U.S. deficit to reach $1 trillion, unemployment to remain above 8% in 2012

The federal deficit will reach $1 trillion for the fourth consecutive year and unemployment rate will remain around 8% in 2012 as the economy slowly recovers from the Great Recession of 2007 – 2009, according to the Congressional Budget Office.

“The pace of the [economic] recovery has been slow since the recession ended 2 1/2 years ago,” said Doug Elmendorf, Director of the Congressional Budget Office. “We project that it will continue to be slow for the next two years, reflecting both the lingering effects of the…recession and the fiscal restraint that will arise under current law.” 

Projected federal deficits as percentage of GDP under current law. SOURCE: CBO.gov

The CBO’s Budget and Economic Outlook for 2012 – 2022 projected the federal deficit will drop by 2% to $1.1 trillion this year, which is still higher than deficits recorded between 1947 and 2008.

However, the deficit could be cut by half – down to $585 billion – in 2013 if various tax cuts are allowed to expire and approved spending reductions take effect. If the current tax and spending policies continue unchanged, the annual deficit could shrink down to $196 billion by 2018.

Unfortunately, the CBO’s report offered a less sunny outlook on the jobs front. The projections showed the nation’s unemployment rate won’t improve much until after 2013 and will likely remain above 7% until 2015.

Job growth will remain sluggish due to weak demand for goods and services. Consumer demand will continue to languish as Americans struggle to deal with the loss of wealth (ranging from exhausted retirement funds to depleted savings to depreciated home equity) and accumulation of debt (from credit cards, loans, or mortgages) as a result of the Great Recession.

The budget cuts enacted by Congress to reduce the deficit would further damper consumer demand as long-term unemployed job seekers, seniors, low-income families, and college students receive less assistance and have to cut back on what they spend for goods and services.

As a result, the U.S. Gross Domestic Product (GDP) – or the value of all goods and services produced in the country – is projected to grow by 2% this year but only by 1% in 2013. In fact, the CBO’s report concluded the economy will not fully recover – or perform at its true potential – until at least 2018.

“The economy is only about halfway through the cumulative shortfall in output that will result from the recession and its aftermath,” said Elmendorf. “The costs associated with that persistent output gap are immense and they fall disproportionately on people who lose their jobs, who are displaced from their homes, or who own businesses that fail.”

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4 Comments on “CBO projects U.S. deficit to reach $1 trillion, unemployment to remain above 8% in 2012

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